Australia: When ordinary and customary is not ordinary at all: Court rules that employees’ expectations are a critical factor in determining redundancy pay entitlements

In the Berkeley Challenge decision, the Court confirms the critical importance of employees’ expectations of continuing employment in determining whether there is an entitlement to redundancy pay.

One of the many unique features of the Australian industrial relations system is an entitlement to redundancy payments when an employer determines that it no longer requires the role being performed by the employee to be performed by anyone. Since its inception, this entitlement has been subject to some important exceptions, including where the termination of employment is ‘due to the ordinary and customary turnover of labour’.^[1]

This exception has grown in importance as the labour market has changed, as employers in all manner of industries increasingly provide services to clients based upon contracts of a finite duration. Security, hospitality and cleaning are just the most obvious examples.

And so the old notion of the ‘ordinary and customary turnover of labour’ needs to be applied in these changing environments.

This article is about the most recent statement of how that is done by the Full Court of the Federal Court in Berkeley Challenge Pty Ltd v United Voice [2020] FCAFC 113. It is important because large numbers of employees are effected, right across the economy.

Background

Before the Full Federal Court were appeals from two earlier decisions in United Voice v Berkeley Challenge Pty Ltd [2018] FCA 224 and Fair Work Ombudsman v Spotless Services Australia Pty Ltd [2019] FCA 9. Briefly, the relevant facts were:

• Both employers were in the service provider industry and performed work under client contracts which had been in place (and rolled over) for a number of years.
• Each of the affected employees were engaged for a significant period of time, and they were not advised of (and their employment contracts made no reference to) their continuing employment being linked to a client contract or the potential they would be terminated due to the loss of a client contract.
• As a result of unsuccessful re-tenders for work the affected employees were ultimately terminated without any redundancy pay, with the employers relying on the ‘ordinary and customary turnover of labour’ exception.
• In both of these decisions, the employers failed to show that the redundancies fell within the exception.

Justices Collier, Rangiah and Rares each concluded that both appeals should be dismissed. They ultimately held that the termination of the affected employees did not fall within the exception because there was no evidence that the turnover of labour was ordinary and customary when considering the circumstances of the employers, the industries or the employees concerned. Accordingly, the employers were each liable to make redundancy payments to the affected employees.

What is the proper construction of the exception?

Although their Honours warned that it was not possible or appropriate to outline an exclusive list of relevant factors, they nonetheless went on to identify the following five factors that could indicate whether there is an “ordinary and customary turnover of labour”.

Expectations of employees

The Court found that the reasonable expectations of employees are “a critical, but not the only, factor in determining whether the particular termination was due to the ordinary and customary turnover of labour”. The Court observed that this will be a question of fact.

What is “reasonable” in a given situation will be determined by an objective assessment of the employment relationship, in particular by reference to the nature of the work they were employed to do and the circumstances in which they came to be employed or in which their employment continued, and what the employee knew or could have known, not facts that were “known (or could be known) only to the employer as a “hidden” practice of that employer” (for example, uncommunicated internal policies). These known facts could derive from material provided to employees by the employer (such as a clear contractual provision, or a policy or other communication) or facts generally known about an industry (such as an understanding that employment in the industry is of a certain character).

However, matters that are only communicated to employees when the employer comes to terminate their employment on the basis that a client has terminated or not renewed a contract are in a different category, and will likely not be considered relevant in determining the reasonable expectations of employees.

Whether turnover of labour was a normal feature of “the” business

The Court found that the 'normal feature of a business' refers to a feature inherent in the nature of the particular kind of business, not a feature that was made normal for the particular business by its own practices in terminating employees.

Nevertheless, the Court accepted that the “normal” features of the employer’s business are relevant, albeit not decisive. This may include the employer’s size and industry, whether the employer is part of a corporate group (and the practices of that group), labour turnover frequency and practices within the employer and the group, and the manner in which an employer and the corporate group conducts its business. An employer cannot simply adopt certain termination practices and then claim they fall within the exception.

The nature of the job to be performed

The Court also noted that the nature of the job itself, such as the nature of the work or the kind of business activity being conducted by the employer, or industry in which it operates, may indicate that the employment would come to an end even though the business would be ongoing. For example, workers in the construction industry who are employed on terms which envisage irregular employment, or workers engaged for a specific job or contract.

The Court noted that “if the terms of the contract between the employer and the employee explicitly state that the job is not to be ongoing… there may be little ambiguity in respect of the nature of the job”.

Whether “customary” requires long-standing practice

Another relevant factor to take into account is whether practices of termination are “long-standing” for that particular type of employment or business. The Court observed that “customary” indicates that the exception is concerned with instances where it is generally habitual or a matter of long-standing practice for the particular kind of employment to be terminated rather than ongoing. This may be the case even if the business of the employer itself is not of long-standing practice.

Whether the event of termination is unusual

The last factor the Court examined is whether the event of termination is unusual. Terminations that arise from unusual circumstances will not fall within the meaning of “ordinary and customary turnover of labour”. By way of example, the Court referred to terminations arising from adverse economic circumstances, and stated these are not “ordinary and customary turnover of labour”.

What does this mean for employers?

Although the Court stressed that each case will be highly dependent on its own facts, we now have clear guidance on five relevant factors that the Court will examine when determining if the exception applies. In light of these, employers should endeavour to:

1. at the time of the employee’s engagement (and throughout their employment), clearly communicate whether continuing employment is linked to an external contract or could be terminated due to the loss of an external contract;
2.  consider engaging employees on fixed term contracts for a specific job or contract if the “ordinary and customary turnover of labour” is an inherent feature of the employer’s “particular kind of business”;
3. ensure that the express contractual arrangements accurately reflect whether employees are engaged on the basis that their employment is finite and/or dependent on external factors; and
4. carefully consider each of the factors discussed above when making a decision to rely on the exception, keeping in mind that these are not an exhaustive list.

Endnotes

[1] The exception is now contained within section 119(1)(a) of the Fair Work Act 2009 (Cth).

This article was written by Anthony Longland, Partner, Giacomo Giorgi, Senior Associate and Linda Nguyen, Solicitor.  

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